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Could someone in Coventry please pick up the phone? That was the message in Friday's announcement from the consortium stalking Severn Trent. LongRiver Partners offered to buy the U.K. water utility based in the Midlands city for £22 a share, or £5.3-billion ($8.4-billion). The offer is conditional, but it is the first one the bidder has made public; two quieter approaches since mid-May were rebuffed by the target's board. At a one-third premium to Severn Trent's average six-month share price to May 13, this one merits fuller consideration.
Severn Trent is one of only three U.K. water utilities still listed on the stock market after a string of public-to-private deals. That might be seen as a pity. In fact, it is a vote of confidence. These companies are closely regulated and (if they are well run) produce steady, predictable earnings. They are the sort of assets that appeal to very long-term investors such as LongRiver. That is the suitably Rocky Mountain name for the consortium, made up of Borealis (the infrastructure investment arm of the Ontario Municipal Employees retirement scheme), the Kuwait Investment Office, and the U.K. Universities Superannuation Scheme.
LongRiver says its offer is "full and fair." It is pitched at a 41 per cent premium to Severn Trent's regulatory capital value (the value that OFWAT puts on the utility's assets) using Severn Trent's fair value debt of £5.1-billion rather than its net debt of £4.3-billion. (The higher figure includes debt servicing costs to maturity.) That is certainly a full price: earlier deals were done at a smaller premium. The purchase of Northumbrian by Cheung Kong Infrastructure of Hong Kong in 2011, for example, was completed at a 28 per cent premium to its RCV.
Severn Trent's shares touched the offer price on Friday after LongRiver made its offer public. But they fell back under £21 later, which suggests that investors think a deal will be done. (The shares are up a quarter in the past three months.) Severn Trent's board has been right to fend off LongRiver's earlier approaches: the last one was pitched at £21.25. No wonder there was a hint of impatience on LongRiver's part this time. If a phone is ringing in Coventry, that'll be the Canadians.
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